Note 13 — Commitments and Contingencies and Other Matters

Commitments

Commitments Related to Expansion of Well Intervention Fleet

In March 2012, we executed a contract with a shipyard in Singapore for the construction of a newbuild semi-submersible well intervention vessel, the Q5000. This $386.5 million shipyard contract represents the majority of the expected costs associated with the construction of the Q5000. Pursuant to the terms of this contract, payments are made in a fixed percentage of the contract price, together with any variations, on contractually scheduled dates. At December 31, 2013, our total investment in the Q5000 was $210.6 million, including $173.8 million of scheduled payments made to the shipyard.

In July 2012, we contracted to charter the Skandi Constructor for use in our North Sea well intervention operations. The vessel was delivered to us on April 1, 2013. The initial term of the charter will expire in March 2016.

In August 2012, we acquired the Discoverer 534 drillship from a subsidiary of Transocean Ltd. for $85 million. The vessel, renamed the Helix 534, underwent upgrades and modifications to render it suitable for use as a well intervention vessel and commenced well intervention operations in February 2014. At December 31, 2013, our investment in the acquisition and subsequent upgrades to and modifications of the Helix 534 totaled $202.8 million, including related well control equipment.

In January 2013, we contracted to charter the Rem Installer for use in our robotics operations. The vessel was delivered to us in July 2013. The initial term of the charter will expire in July 2016.

In February 2013, we contracted to charter the Grand Canyon II and the Grand Canyon III for use in our robotics operations. The terms of the charters will be five years from the respective delivery dates, which are expected to be in 2014 and 2015.

In September 2013, we executed a second contract with the same shipyard in Singapore that is currently constructing the Q5000. This contract provides for the construction of a newbuild semi-submersible well intervention vessel, the Q7000, which will be built to North Sea standards. This $346.0 million shipyard contract represents the majority of the expected costs associated with the construction of the Q7000. Pursuant to the terms of this contract, 20% of the contract price was paid upon the signing of the contract and the remaining 80% will be paid upon the delivery of the vessel. At December 31, 2013, our total investment in the Q7000 was $76.7 million, including the $69.2 million paid to the shipyard upon signing the contract.

Lease Commitments

We lease several facilities and vessels under non-cancelable operating leases expiring at various dates through 2025. Future minimum rentals under these leases at December 31, 2013 are as follows (in thousands):


		Vessels		Facilities and Other		Total

2014	$	119,672	$	3,433	$	123,105
2015		144,478		4,242		148,720
2016		109,155		3,864		113,019
2017		80,705		3,881		84,586
2018		47,595		3,917		51,512
Thereafter		45,938		21,550		67,488
Total lease commitments	$	547,543	$	40,887	$	588,430

Total rental expense under these operating leases was approximately $102.1 million, $85.0 million and $62.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

We sublease part of our corporate headquarters facility to a third party under a non-cancelable sublease agreement. Total rental income from this sublease was $0.4 million in 2013. As of December 31, 2013, the minimum rentals to be received in the future totaled $2.4 million.

Contingencies and Claims

Under terms of the equity purchase agreement for the sale of ERT, we required the buyer to provide bonding in a sufficient amount as determined by the Bureau of Ocean Energy Management (the “BOEM”) to cover the decommissioning costs of ERT’s lease properties and thus to replace and allow for a full discharge of our existing guaranty to the BOEM for ERT’s lease obligations. The buyer posted the bonding required by the equity purchase agreement, and a formal request to the BOEM for a release of our guaranty is pending.

In 2007, we were subcontracted to perform development work for a large gas field offshore India. Work commenced in the fourth quarter of 2007 and we completed our scope of work in the third quarter of 2009. We had collected approximately $303 million related to this project with an amount of uncollected trade receivables remaining. In 2010, we requested arbitration in India pursuant to the terms of the subcontract to pursue our claims and the prime contractor also requested arbitration and asserted certain counterclaims against us. Based on a number of factors associated with ongoing negotiations with the prime contractor, in 2010, we reduced our trade receivable balance to an amount that we believed to be ultimately realizable. The parties have been engaged in extensive settlement discussions over time to resolve this matter outside of the arbitration process, and in December 2013 the parties reached a settlement agreement, pursuant to which we collected the receivable and the parties dropped all claims against each other.

We are currently undergoing a value added tax (“VAT”) audit from the State of Andhra Pradesh, India (the “State”) for the tax years 2010, 2009, 2008 and 2007 related to an Indian subsea construction and diving contract that we entered into in December 2006. We believe that we have complied with all rules and regulations as related to VAT in the State and we anticipate no additional assessments as a result of this audit.

Litigation

On July 8, 2011, a shareholder derivative lawsuit styled City of Sterling Heights Police & Fire Retirement System v. Owen Kratz, et al. was filed in the United States District Court for the Southern District of Texas, Houston Division. In the suit, the plaintiff makes claims against our Board of Directors, certain of our former directors, certain of our current and former executive officers, and the independent compensation consultant to the Compensation Committee of our Board of Directors, for breaches of the fiduciary duty of loyalty, unjust enrichment and aiding and abetting the alleged breaches of fiduciary duty relating to the long-term equity awards granted in 2010 to certain of the Company’s then executive officers who are defendants. The defendants filed a motion to dismiss the claim asserting that the plaintiff has not (i) pled specific facts excusing its failure to make pre-suit demand on our Board of Directors as required by Minnesota law; (ii) filed proper verification; or (iii) stated a claim. A ruling regarding the motion is pending.

On May 12, 2012, a shareholder derivative lawsuit styled Mark Lucas v. Owen Kratz, et al. was filed in the 270th Judicial District in the District Court of Harris County, Texas. In the suit, the plaintiff makes claims against our Board of Directors, certain of our former directors, certain of our current and former executive officers, and the independent compensation consultant to the Compensation Committee of our Board of Directors, for breaches of the fiduciary duties of candor, good faith and loyalty, unjust enrichment and aiding and abetting the alleged breaches of fiduciary duty relating to the long-term equity awards granted in 2010 to certain of our executive officers. This case is essentially a “copycat” complaint asserting similar causes of action arising out of the same facts as set forth in the federal action described above. The plaintiff is generally demanding disgorgement of the excessive compensation, restraint on the disposition/exercise of the alleged improperly awarded equity, implementation of additional internal controls, and attorney’s fees and costs of litigation. The defendants filed motions to stay and dismiss the proceeding, which motions were denied by the trial court judge. The defendants then filed a petition for a writ of mandamus with the state appellate court, in which they requested that court to direct the district court to grant the motion to stay or dismiss the case. The appellate court denied the request to grant mandamus with respect to this requested relief, but did grant a writ of mandamus ordering the lower court to vacate its ruling to the extent the plaintiff failed to plead with particularity that our Board of Directors wrongfully refused his demand, and that he was a shareholder of record at the relevant time. A special committee of our Board of Directors has since determined to reject the plaintiff’s demand regarding this matter, and based on this rejection, as well as the plaintiff’s pleadings, the defendants filed a motion for summary judgment in December 2013, which is pending before the court.

We are involved in various legal proceedings, primarily involving claims for personal injury under the General Maritime Laws of the United States and the Jones Act based on alleged negligence. In addition, from time to time we incur other claims, such as contract disputes, in the normal course of business.

Insurance

We maintain Hull and Increased Value insurance which provides coverage for physical damage up to an agreed amount for each vessel. The deductibles are $1.0 million on the Q4000, the HP I and the Well Enhancer, $500,000 on the Seawell and the Helix 534. In addition to the primary deductibles, the vessels are subject to an annual aggregate deductible of $5 million. We also carry Protection and Indemnity (“P&I”) insurance which covers liabilities arising from the operation of the vessels and General Liability insurance which covers liabilities arising from construction operations. The deductible on both the P&I and General Liability is $100,000 per occurrence. Onshore employees are covered by Workers’ Compensation. Offshore employees and marine crews are covered by a Maritime Employers Liability (“MEL”) insurance policy which covers Jones Act exposures and includes a deductible of $100,000 per occurrence plus a $1.0 million annual aggregate deductible. In addition to the liability policies described above, we currently carry various layers of Umbrella Liability for total limits of $500 million excess of primary limits. Our self-insured retention on our medical and health benefits program for employees is $250,000 per participant.

We incur workers’ compensation, MEL, and other insurance claims in the normal course of business, which management believes are covered by insurance. The Company analyzes each claim for potential exposure and estimates the ultimate liability of each claim. At December 31, 2013, we did not have any claims exceeding our deductible limits. We have not incurred any significant losses as a result of claims denied by our insurance carriers. Our services are provided in hazardous environments where accidents involving catastrophic damage or loss of life could occur, and litigation arising from such an event may result in our being named a defendant in lawsuits asserting large claims. Although there can be no assurance the amount of insurance we carry is sufficient to protect us fully in all events, or that such insurance will continue to be available at current levels of cost or coverage, we believe that our insurance protection is adequate for our business operations. A successful liability claim for which we are underinsured or uninsured could have a material adverse effect on our business.